The Forex (Foreign Exchange) Rates

Foreign exchange or Forex is the simultaneous buying of one currency for another at a set rate called the exchange rate

Foreign exchange or Forex is the simultaneous buying of one currency for another at a set rate called the exchange rate. This exchange rate is the relative value between two currencies. In particular, the quantity of one currency helps to set the currency required for buying or selling one unit of the other currency.

Sounds difficult! Let's look at the following example:
An exchange rate of 100 JPY (Japanese Yen) to USD (United States Dollar) means that 100JPY is worth the same as 1USD.

Before you go inside the method of how currency rate is determined, you should know about basis point. A foreign exchange rate is generally expressed by way of a whole number integer followed by 4 decimal points like 0.0001.

Each of the numbers is called a basis point. So, if an exchange rate goes from 1.4510 to 1.4560, the currency is said to have changed by 50 basis points.

If you look closely at the forex foreign exchange rates, you will see that mainly two types of methods are used to express the rates. The method that is used widely is rate based on the amount of any currency that is required to buy one USD. For example, a foreign exchange quote is expressed as USD/CND at 1.4300. This means that 1 USD can be exchanged for 1.43 Canadian dollars.

Another method of quoting rate is simply the reverse of the first method. In this method, the foreign exchange rate is expressed in terms of the USD amount that can be exchanged for one unit of foreign currency.

If USD is not used to express forex foreign exchange quote, the term cross rate is usually used to express the relative values between two currencies. For example - DEM/SFR at .7000. This means that one Deutschemark can be exchanged for .7 Swiss Francs.

There are two more terms that you need to know to understand forex foreign exchange rates. These are spot exchange rate and forward exchange rate.

* The spot exchange rate is used to refer to the current exchange rate
* The forward exchange rate is used when the rate is quoted and traded today but for delivery and payment on a specific future date

The exchange rate quotation states the number of units of a price currency that can be bought in terms of 1 unit currency. E.g. if it is mentioned in any quotation that the exchange rate for EUR-USD is 1.2 USD per EUR, this means that the price currency is USD and the unit currency is EUR.

* Direct quotation: If quotes are given using a country's home currency as the price currency (from the country's perspective).E.g. £0.574744 = $1 in the UK

Direct quotation: 1 foreign currency unit = x home currency units

* Indirect quotation: If quotes are given using country's home currency as the unit currency. E.g. $1.73990 = £1 in the UK.

Indirect quotation: 1 home currency unit = x foreign currency units
If the home currency becomes strong and become more valuable using direct quotation, the exchange rate number decreases. Conversely if the foreign currency becomes strong, the exchange rate number increases, which indicates that the home currency is depreciating.

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